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A Complete Guide to Golden Cross Trading Strategy

The golden cross is a technical chart pattern indicating the potential for a major rally. The golden cross appears on a chart when a stock’s short-term moving average crosses above its long-term moving average. The golden cross can be contrasted with a death cross indicating a bearish price movement.

What is Golden Cross Trading Strategy?

The golden cross trading strategy is based on the long-term trend of the stock. When the long-term trend is going up, the golden cross should be traded. Only those stocks that show golden cross should be bought for accumulating portfolio. It is because when the stock market goes through ups and downs, it creates a whipsaw effect in the short-term trend of the stock. This whipsaw effect can be avoided by investing in those stocks that go through golden cross.

How to trade Golden Cross?

In the beginning you need to gather some basic information regarding the stock to be traded. It is very important to know the current price and the 52 week high and low price. The 52 week high and low price of the stock represents the long-term trading trend of the stock. Check the 52 week high and low price when the stock is trading at the high or the low. Before going in for trading trade must be entered in the 52 week low or the 52 week high.

This concludes that the trading of the stock should be entered after the stock price has touched the 52 week high or the 52 week low. If the price is above the 52 week high, long position trade should be entered. If the price is below the 52 week low, a short position trade should be entered.

A stock reaches the point of the golden cross when its short-term moving average has crossed above its long-term moving average. This point can be interpreted as the time signal that rally is about to begin. When it is safely assumed that the long-term rally has begun, buying to accumulate the stock is the right thing to do. It is because when a stock’s short-term moving average crosses above its long-term moving average, it should be considered as a signal that its price will rise in the future.

In such a case, the trader should buy a stock in the anticipation of its price rising in the future. This means that the trader buys the stock to accumulate. When announcing “buy on the rumor, sell on the news”, Jim Rogers suggested buying stocks that are in golden cross or a breakout from a trading range.

This means that when a stock’s short-term moving average hits the long-term moving average, it is the time to buy. In order to buy stocks at the 52 week low price, it is essential to know the price. Thus the trader is required to buy with good timing. This can be achieved while taking advice from the experts or using the right software that can do this job.

How to calculate the Golden Cross?

When the price of a stock is above the 52 week high, a golden cross opens a 3.8% chance of the price increasing.

When the price of a stock is below the 52 week low, a golden cross opens a 5.6% chance of the price increasing.

How to Calculate The Golden Cross:

Golden Cross Calculation Example

Consider this example; you are about to take a position in a stock that has a $50.00 price and a $65.00 price.

The stock’s 52-week high is $65.00 while the 52-week low is $45.00.

Using the price difference between current price and 52-week high (52-week low = $10), the formula for golden cross is as follows.

Crossing the 52-week high (low) in a stock above (below) The Current Price, should open new positions in the stock. Use this information as a guide to trade. Further, it is essential to set stop-loss levels in case of a loss. This can be done by using portfolio management software.

E.g. if the price difference between current price and 52-week high is $10 then the formula is as follows.

Sell price = Current price – [(52-week high – 52-week low)/2]

Further, to calculate the stop loss you can use the following formula.

Stop-loss price = [(Current price – Sell price) * 0.9]

How to calculate the Stop Loss after Purchase?

The stop loss on turnover, or the percentage drop from purchase price, is generally used to calculate it. As you may know, long term stock trading can be risky. However if leverage is applied, it increases the portfolio risk. This means that leverage is applied for taking the portfolio to the long term goals.

The larger the leverage, the larger the loss in order to reach the target. However, the risk of reaching the target also increases with the leverage applied.

Thus the technique used to calculate stop loss is as follows.

Step 1: The total capital for entry (without leverage) is calculated.

Step 2: Margin position quantity is calculated.

Step 3: Margin leverage is calculated.

Step 4: Stop loss is calculated.

However, if you calculate golden cross stop loss, you should consider the stop loss as a percentage of the total capital. Calculate the stop loss when the stock is at the golden cross. If the view is on buying, the stop loss price should be calculated and entered. You can calculate the stop loss as 2.5% of the total capital or $2,500. Thus the stop loss should be entered as a percentage of the total capital.

E.g. If the trader uses the total capital of $200,000 and the stake is 2.5% of adding capital, then the stop loss should be entered as $5,000. Thus the initial stop loss should be entered as $5,000 while buying the stock at golden cross.

The stop loss on the investor’s capital is referred to as the percentage stop-loss loss. Further, the stop loss on the margin position and the leverage position is referred to as the percentage stop-loss on margin.

How to Calculate the Stop Loss on Margin?

Use the following steps to calculate the stop loss on the margin before you purchase an asset.

Step 1: Calculate the margin percentage position.

Step 2: Calculate the stop loss percentage if the stock is at the investor’s capital.

Step 3: Calculate the stop loss percentage if the stock is at the margin position.

When using portfolio management software, you can calculate the golden cross stop loss values. Calculate the position’s stop-loss before you buy the stock above the investor’s capital.

E.g.

Total Capital = $200,000

Position’s Margin Percentage = 100%

Stop loss Price Investor’s Capital = 2.5%

Stop loss price = $2,500

Stop Loss Price Margin Percentage = 7.5%

Thus the stop loss value is $7,500

Post-Trade Management

Only a small percentage of entry positions that are taken will succeed in the end. Thus only a small percentage of positions taken will be sold at the target or final price. Some will work towards the target while others will fail and will close a loss. It is essential to manage a position intelligently to achieve the maximum gain in the target price.

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